David Cameron has suffered a fresh political blow as the Conservative Party
chairman admits that she failed to declare thousands of pounds in rental
income.

Baroness Warsi said she did not tell House of Lords authorities that she was receiving income from a London property she had bought and rented out.

She apologised last night for the breach of parliamentary guidelines, blaming “an oversight, for which I take full responsibility”. However, she claimed she had paid tax on the rent.

The disclosure, the latest in a series of crises to hit Mr Cameron, comes as the future of Jeremy Hunt, the Culture Secretary, is called into question once again.

Senior sources told The Sunday Telegraph that Mr Hunt, who will be questioned under oath at Lord Leveson’s inquiry into media standards this week, could temporarily step down from front-line politics after the Olympics.

It follows intense pressure over his handling of the attempt by Rupert Murdoch’s News Corporation to take full control of BSkyB.

The admission by Baroness Warsi is a serious blow to the Conservative Party’s pledge to be transparent in its dealings, and will increase pressure on Mr Cameron to replace her in a reshuffle.

The failure to make a declaration means that the public was unaware that she had another source of income, over and above her salary, which is paid by the Conservative Party, and the £300 a day allowance which she is eligible to claim when she attends the Lords.

The Prime Minister and Baroness Warsi have spoken of the commitment to transparency by the Conservatives and the Coalition.

In November 2010 Mr Cameron said “it is our ambition to be one of the most transparent governments in the world”.

In July last year the peer said: “This Government is delivering unprecedented transparency.” The total amount that she failed to declare is not known because Baroness Warsi did not disclose it last night.

Peers are required to register any rental income worth more than £5,000 in a calendar year but do not have to say how much.

However, the amount is likely to run into five figures because it involves rental income from a home in London for at least 12 months.

As well as raising questions over her own financial affairs, it will further strain relations with grassroots members, among whom the 41-year-old baroness is not believed to enjoy widespread popularity.

The political career of her special adviser was also in question last night.

The failure to make a declaration emerged from a dispute between Baroness Warsi and a Conservative donor and fund-raiser, Dr Wafik Moustafa.

He was upset when the Conservative Arab Network, which he founded, was told earlier this year to sever its links with the party and was subsequently threatened with legal action by Baroness Warsi.

That prompted him to disclose that he had given her and her special adviser, Naweed Khan, accommodation in London.

In the course of inquiries made because of his public statement, the failure to make a disclosure about her rental income was discovered.

Baroness Warsi said last night that she bought a flat in Wembley, north-west London, in September 2007 to use after being ennobled.

However, she said that the property transaction was not “due for completion” until 2008 and so she had to find accommodation elsewhere, “predominantly” in two hotels.

“Not having made advance bookings for these hotels, there was a period of about six weeks when I spent occasional nights at a flat in Acton, which was occupied by Naweed Khan, at the time a member of Conservative Campaign HQ staff,” she said. “For the nights that I stayed as a guest of Naweed Khan, I made an appropriate financial payment equivalent to what I was paying at the time in hotel costs.” However, Mr Naweed was actually staying rent-free at Dr Moustafa’s home in London, meaning that by extension Baroness Warsi was receiving his hospitality.

Baroness Warsi said she moved into the Wembley home in March 2008 and stayed there until June 2010, when “upon security advice, I moved to another address closer to the House of Lords”.

She said that some months later she began, “with the prior approval of the Cabinet Office and the Leader of the House of Lords, to let out the Wembley property”.

“Due to an oversight, for which I take full responsibility, the flat was not included on the Register of Lords’ Interests when its value and the rent received came to exceed the thresholds for disclosure,” she said.

“When the discrepancy became apparent this week, I immediately informed the Registrar of Lords’ Interests of its omission. I repeat: at all times my ownership of the flat and the fact that it was being let out was fully disclosed to Cabinet Office officials and HM Revenue and Customs, and was appropriately reported on the register of Ministers’ interests held by the Government.” The disclosure means that she failed to declare rental for at least 12 months, and up to 18 months. An average rent for a one-bedroom flat in Wembley is currently £1,000 a month, meaning the amount undeclared could be as high as £18,000.

Baroness Warsi has been criticised over her performance as Tory party chairman.

Some Conservative MPs want Mr Cameron to replace her with Grant Shapps, the housing minister. Earlier this month the Conservatives performed poorly in local elections, losing more than 400 council seats.

Baroness Warsi became the first Muslim woman to be selected as a parliamentary candidate by the Tories, contesting the Dewsbury seat in 2005, but failed to win.

She went on to be a special adviser to Lord Howard, the former Conservative leader, but saw her career take off under Mr Cameron, who made a special effort to promote ethnic minority candidates and party officials as part of his drive to modernise the Tories.

This month she said a small minority of Pakistani men saw white women as “third-class citizens” and “fair game” — following a case which saw nine Muslim men found guilty of grooming young white girls for sex.